Why Redevelopment Reduces Your Taxes

        Residents city-wide often complain about rising property tax bills and not enough affordable housing. Who can blame them?

If you are a homeowner, you wince each year at this time when you receive your annual tax bill from Montgomery County. If you’re on a fixed income like so many seniors (including this household), you wince even harder. If you rent, it may seem your hope of ever owning your own home is becoming ever more remote.

Of course, we have rent stabilization, a.k.a, rent control. It helps protect tenants against unreasonable (from tenants’ viewpoint) rent adjustments. Our frustration is compounded by the fact that the Montgomery County Council gets to set it own tax rates, regardless of what we think. A case in point, in the fiscal year just completed (FY 18), your City Council — on which I served — not only reduced the city’s rate, but reduced it further to counteract rises in the property assessments, so that your out-of-pocket tax bill would decrease. But, alas, the County raised its tax rate so high as to completely annihilate our reduction.

There Is Hope

If you believe there is no answer for these annual hits to our pocketbooks, you would be dead wrong. So if you are tired of handwringing and gnashing of teeth, then take heed. There is a solution and it’s easy to grasp.

First, understand that over the past eight fiscal years from 2011 to 2018, property tax has constituted a dominant percentage of Takoma Park’s annual revenue, ranging between 52% and 71%. Over these 8 years, property tax has averaged 61% of the city’s revenue.

Second, most importantly, our city fully controls its property tax revenue. Our city answers to no one when it comes to setting the tax rate, except to you/us, the voters. This can’t be said about our other sources of revenues, which are affected by politics, other governments and economic factors.

Third, we all understand that if property assessments were to magically double, then everyone’s tax rate could be cut in half and the city would remain whole.

Thus, the obvious solution is to get property assessments to go up . . . way up. Thousands of jurisdictions across the US employ this approach.

How Do We Do That?

We do that by focusing on the redevelopment of many, if not most of the commercial properties along New Hampshire Avenue. These properties are underdeveloped, meaning that under the County Zoning Code and Master Plan they fall well short of what they are expected to physically accommodate. By building new commercial and/or residential uses to their maximum potential on these sites, the assessed values will go way, way up.

Says who? you might ask.

The Maryland Dept. of Transportation is who. MDOT published a report in November, 2016 regarding the “New Hampshire Avenue Corridor Economic Potential.” The City instigated the research through the assistance of our District 20 Delegation in Annapolis. The study area extended from the D.C. border at Eastern Ave to Piney Branch Rd to the north. It’s purpose was to derive an estimate of the potential tax revenue if the corridor were built out to its potential under the respective PG County (2009) and Montgomery County (2012) Sector Plans and the New Hampshire Avenue Corridor Concept Plan (2008). The Maryland Dept. of Planning identified and analyzed 15 redevelopment sites in the corridor and calculated future development capacity for each site and accounted for future expanded road widths and set backs. 11 of these sites are in Takoma Park.

The results were astonishing. At the time of the study (using 2013-2015 assessments) the 15 sites had an aggregated assessed value of $274.15 million, or $2.13 million per acre. They generated $3.46 million annually in property taxes spread among the State of Md, two counties and Takoma Park.

The study used two different models of potential redevelopment, the primary one assumes a 50/50 split between commercial and residential land use. They estimated that combined assessed values would be $2.39 billion, or $18.57 million per acre. The difference is a factor of nearly 9. This would generate $29.80 million in property taxes. The lion’s share would go to the two counties, a little bit to the state, and about $6.14 million to Takoma Park. The second model assumes a 96/4 split, effectively solely residential, the benefit of which in taxes to the City would be a little less at $5.32 million.

Let’s put this in a sensible context. The City’s FY 2018 adopted budget was just shy of $32 million. Of this, property tax revenue was about 52%, or about $16.6 million. In this context, $6.14 million in property taxes is a very big deal. It is a difference maker.

The research takes into account a lot of parameters and generates many other findings that can’t be discussed here. In any case, the study is well grounded in data and reasonable methodologies. https://documents.takomaparkmd.gov/initiatives/New_Hampshire_Initiative/2016.11.23-MDPlanning-New-Hamp-Ave-Corrdior-Econ-Dev.pdf

The hopefully obvious point here is that when high-to-medium density residential or commercial buildings (or a mix) get built, assessments go up big time and the tax rate for every property owner in the city goes down.

Where?

We don’t know the sites MDOT studied for potential redevelopment. There are many obvious ones, however, ripe for redevelopment because the improvements are old, obsolete and decaying. Most parcels are inefficiently used with extensive unused asphalt parking areas. These include:

1.   The former Washington-McLaughlin Christian school, a large structure that has sat mostly abandoned for maybe 12 to 15 years except for 6 senior housing units and a small adult day care center. There’s an acre or two of empty land to the rear, not including Dorothy’s Woods.

2.   The 10-acre site at University and New Hampshire. JBG, the biggest developer in Washington, purchased it in 2015 for the sole reason of redeveloping most, if not all of the site. JBG buys, develops and holds properties, and does not flip them.

3.   The 2.15 acre Advance Auto Parts site at the corner of Eastern and NH Ave, whose owner, Harvey Maisel, has for years wanted to replace the store with a large storage facility (which is not permitted). The site is an ideal, signature “gateway” for Takoma Park with huge potential for multi-story housing, retail and parking per the Corridor Concept Plan.

 

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Advance Auto at Eastern Ave

4.   The 3.5 acre site, familiarly known as the “Spanos” property, sits near the corner of NH Ave and Ethan Allen (Rte 410) across from the U-Haul. The original 70-year old strip center houses King Pawn, Walla Ethiopian Restaurant and Value Furniture & Rugs among others. Zoned at CRT 1.5, it has great redevelopment potential for a variety of uses. The existing structure is surrounded by unused, asphalt parking areas.

5.   The replacement of the Rec Center on NH Ave with a multi-level mixed-use building on top of a much larger, new rec center and below ground parking. The property is owned by Montgomery County who is at present negotiating to sell it to Takoma Park. Four different developers have shown interest in developing the site in partnership with the City.

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6400 and 6500 block of NH Ave has empty lots and inefficient buildings

 

6.   The 6400 and 6500 blocks of NH Ave are occupied by mostly old and/or inefficient commercial buildings with acres of unused asphalt. Any two adjacent parcels could be consolidated by a developer and turned into attractive, environmentally sensitive business locations with affordable housing units on top. All of this would comply with the New Hampshire Avenue Corridor Concept Plan, which is described here, https://www.thenewave.com/_files/docs/new-hampshire-avenue-concept-plan-web_2.pdf.

 

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acres of unused asphalt

The above is a short list, among many others, that illustrate the enormous unrealized potential. When developed, these sites will give huge boosts to Takoma Park’s tax revenues.

So Then What?

The logical next question is how do we make this happen. This is where a program called economic development comes in. It’s a specialized set of programs and actions designed to do two things: (1) Help attract business and development to the city. This involves promoting the city as a tempting place to invest, to build, or to operate your business. (2) Equally important is looking out for the best interests of the businesses and property investors already here. This, by the way, includes residential landlords.

This year City Council has budgeted to install an economic development program for the first time in its history. The city will be hiring a professional in economic development to lead this effort.

I worked in real estate and economic development for about 13 years. Later I spent 15 years as a commercial lender to real estate projects (new, rehab and expansion) and businesses. Some of my loan customers failed. So I know what success and frustration in the business world looks and feels like.

A Fresh Perspective

Some people associate “developers” with bad news, such as being big “outside corporate interests,” only profit-oriented and unconcerned about the local community, or money-grubbing residential landlords who just want to exploit their tenants to line their pockets. We do indeed have some slumlords in our city, but these are few.

Consider instead this fresh perspective. For a homeowner, buying a house or condo will be the biggest personal financial purchase he or she will ever make. In that sense, every home buyer is literally investing in Takoma Park. Yet the financial risk for most is not high.

Contrast that with those who invest in multi-family or commercial properties. Their investment is in the millions and requires obtaining a business or real estate loan. The deal will depend solely on the expected positive cashflow of the enterprise. Quite often, the borrower has to personally guarantee the debt. Also, if you think owning and managing a multi-family property is easy money, try it sometime. It’s hard and complicated.

For a small business start-up, the investment may not be quite so large, but the risk is extraordinarily high. Unlike a home mortgage, business loans are almost always of short duration and at much higher interest rates because of the risk to the lender. An enterprise’s failure can wipe out almost everything the principals own, including the possible loss of their home; their livelihood, their credit, their dreams and morale.

Thus, if it weren’t for such investors and risk takers, there might not be an Old Town as we know it, or the scores of independent businesses that we patronize. So, rather than be antagonistic toward developers, we ought to be grateful for those who are willing to invest in our town, betting their money on Takoma Park.

For some people in Takoma Park, the mere prospect of new development in our city knots their stomach. As for me, I see it differently. I’m not interested in living in a museum and seeing my taxes rise every year. Redevelopment and change are inevitable. While “shabby chic” business areas may be adorable to some, we cannot survive by trying to freeze-dry our city. The real choice is either to get ahead of the curve by being pro-active in our economic development program, or to wait passively for whatever redevelopment befalls us.

But Why Now?

As we know, in some areas in the DC region redevelopment happens seemingly spontaneously because demand for land and marketable space is so high. Places like Arlington County along the Orange Line, in southwest DC around the Nats stadium, Columbia Heights, and along Rockville Pike. Incentives are not necessary. The investors are knocking on the door. In fact, sometimes the opposite is the case where the jurisdictions require developers to contribute proffers to qualify for approval.

Takoma Park, however, is not one of those places, except maybe for Old Town where stores compete to find scarce space. We know that no new residential construction has occurred in Takoma Park since the 1970s. New commercial construction in recent years consists of the Taco Bell (2017) and Walgreen’s (2011). Have I overlooked one? Yes, there’ve been extensive retrofits of existing spaces, but not any new, ground-up construction that adds to the supply of space.

Still, oddly, there are almost no office and commercial vacancies anywhere in our town. Available retail and office space gets adsorbed quickly. So, why, if there is so much demand for space, has there been virtually no new construction? Well, that’s why we need the new economic development staff to help us figure this out and propose how the City can get things moving in a direction we want.

When Do You Have Your Say?

Residents, business owners, landlords and commercial property owners all need to have a say on plans and programs about future redevelopment. I have distinct ideas on this and will talk about this in a future blog.

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